Common Stocks and Uncommon Profits and Other Writings

 
The Third Dimension 
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can also occur in the area of marketing or sales. An example is a company 
that has created in its customers the habit of almost automatically spec- 
ifying its products for reorder in a way that makes it rather uneconom-
ical for a competitor to attempt to displace them. Two sets of conditions 
are necessary for this to happen. First, the company must build up a rep- 
utation for quality and reliability in a product (a) that the customer rec- 
ognizes is very important for the proper conduct of his activities,
(b) where an inferior or malfunctioning product would cause serious 
problems, (c) where no competitor is serving more than a minor seg-
ment of the market so that the dominant company is nearly synony- 
mous in the public mind with the source of supply, and yet (d) the cost 
of the product is only a quite small part of the customer’s total cost of 
operations. Consequently, moderate price reductions yield only very 
small savings in relation to the risk of taking a chance on an unknown
supplier. However, even this is not enough to ensure that a company 
fortunate enough to get itself in this position will be able to enjoy 
above-average profit margins year after year. Second, it must have a 
product sold to many small customers rather than a few large ones.
These customers must be sufficiently specialized in their nature that it
would be unlikely for a potential competitor to feel they could be 
reached through advertising media such as magazines or television. They 
constitute a market in which, as long as the dominant company main-
tains the quality of its product and the adequacy of its service, it can be 
displaced only by informed salesmen making individual calls. Yet the size 
of each customer’s orders make such a selling effort totally uneconom-
ical! A company possessing all these advantages can, through marketing, 
maintain an above-average profit margin almost indefinitely unless a 
major shift in technology (or, as already mentioned, a slippage in its own 
efficiency) should displace it. Companies of this type can most often be 
found in the moderately high technology supply area. One of their 
characteristics is to maintain their image of leadership by holding fre-
quent technical seminars on the use of their product, a marketing tool 
that proves highly effective once a company attains this type of position. 
It should be noted that the “above-average” profit margin or 
“greater than normal” return on investment need not be—in fact,
should not be—many times that earned by industry in general to give
a company’s shares great investment appeal. Actually, if the profit or 
return on investment is too spectacular, it can be a source of danger, as 
the inducement then becomes almost irresistible for all sorts of compa- 

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